by Jonathan Goudy / News, Retirement Planning
Having hopefully piqued everyone’s interest with scary statistics last time, let us proceed to consider the U.S. Department of Labor’s (DoL’s) new Fiduciary rule and its potentially broad impact on society. Nearly one-third of U.S. Households owned individual retirement accounts (IRAs) in 2015, with approximately $7.3 Trillion in assets. Some 59% of those with rollover IRAs worked with a financial advisor in choosing investments. [Investment Company Institute data].
- Retirement plans are jointly regulated by the DoL and the Internal Revenue Service (“IRS”) pursuant to the Employee Retirement Security Act of 1974 (“ERISA”) and the Internal Revenue of 1986 (“IRC”).
- Qualified plans are regulated by ERISA and IRAs are governed by the IRC.
- The DoL Fiduciary rules redefine fiduciary to include any advisor giving investment advice to a plan or its participants and beneficiaries (under ERISA) or IRAs (under the IRC); Fiduciary is the legal term for putting clients’ interests first.
- The DoL also finalized exemptions to the prohibited activity sections of ERISA and the IRC, including the Best Interest Contract Exemption, which permit fiduciaries to receive fees in certain circumstances.
- The Rule is the first and only amendment to the definition of “Fiduciary” under ERISA in forty (40) years, expanding beyond qualified plans to IRAs.
- The Rule was proposed one year ago and received many comments from interested parties, many of which were reflected in the final rule.
- The DoL wanted to ensure that retirement investors receive advice that is in their best interest, with particular concern for the impact of conflicted advice on the retirement assets of retail investors.
The Rule imposes fiduciary duties on advisors who recommend investments to:
- Qualified plans, plan fiduciaries, participants and beneficiaries
- IRAs and IRA fiduciaries
An advisor is deemed to have given investment advice under ERISA if:
- It represents it is acting as a fiduciary under ERISA or the IRC;
- It renders advice pursuant to an agreement where advice is based on a recipient’s individual circumstances; or
- It makes a recommendation as to any particular investment, strategy or similar activity, directed to a specific recipient of the advice.
The Rule specifically makes an advisor’s investment recommendations to rollover assets from a qualified plan or IRA fiduciary in nature. Public speeches, advertisements, investment education, appraisals, fairness opinions and valuations are not deemed investment advice.
This Fiduciary rule marks a radical shift for brokers and broker-dealer firms, who will no longer be judged by a suitability standard but instead, owe a higher, fiduciary duty to put their clients’ interests first. The rule prohibits commission-based fee arrangements and other forms of conflicted compensation common in the brokerage industry. Investment advisors cannot accept compensation or payments that would create a conflict unless they qualify for an exemption that ensures the client is protected. An investment advisor who makes an investment recommendation and receives conflicted compensation in connection with the advice provided to the plan or IRA will engage in a prohibited transaction unless one of the enumerated carve-outs from the rule applies or the advisor complies with the “Best Interest Contract Exemption” (“BICE”) requirement. To keep the reader on the edge of his/her seat, we will address the specifics of the prohibited transaction exemptions and BICE, together with the broader potential impact of the Fiduciary rule, in the next submission.
The Fiduciary rule is effective on June 7, 2016, but is implemented in phases:
- The expanded definition of “fiduciary” will not apply until April 10, 2017.
- Compliance with the various provisions of BICE transition in phases between April 10, 2017 and January 1, 2018.
The House passed a resolution blocking effectiveness of the Fiduciary rule on April 28, 2016, with less than a veto-proof majority, and the Senate is considering such a measure. President Obama has vowed to veto any such legislation hitting his desk.
Remember, it’s not what you make that matters…it’s what you keep!
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.